Not all dividends are taxed the same way

Some dividends are taxed as ordinary income — meaning they're added to your wages, interest, and other earnings and taxed at your regular tax rate. Others are taxed at a lower rate called the may have access to dividend rate. The difference depends on what kind of dividend you received and how long you held the stock.

If you own mutual funds or individual stocks that pay dividends, your brokerage will send you a form in January (usually a 1099-DIV) that tells you which category each dividend falls into. You report both types on your tax return, but they're taxed differently.

Key Takeaways

  • Ordinary dividends — from real estate investment trusts, preferred stock, and most mutual funds — are taxed at your full income tax rate, the same as wages.
  • may have access to dividends from common stock held for more than 60 days are taxed at a lower rate (0%, 15%, or 20%, depending on your income).
  • Your brokerage reports which dividends are ordinary and which are may have access to on Form 1099-DIV, which you receive by January 31.
  • Reinvested dividends are still taxable in the year you receive them, even if you didn't take the cash.

What counts as an ordinary dividend

An ordinary dividend is any dividend that doesn't meet the rules for a may have access to dividend. The most common sources are dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), preferred stock, and many mutual funds.

Ordinary dividends are also what you get from stock you've held for 60 days or fewer around the dividend payment date. Even if the underlying company pays may have access to dividends to long-term holders, if you sold the stock too quickly, your dividend gets taxed as ordinary income.

When you report an ordinary dividend on your tax return, it gets added to your other income — your salary, interest from savings accounts, self-employment earnings — and taxed at your marginal tax rate. If you're in the 24% tax bracket, ordinary dividends are taxed at 24%. If you're in the 12% bracket, they're taxed at 12%.

What qualifies for the lower dividend tax rate

A may have access to dividend comes from common or preferred stock that you held for more than 60 days during the 121-day window around the dividend payment date. The holding period rule exists to prevent people from buying stock just before a dividend payment and selling when ready after.

If you meet the holding period requirement, may have access to dividends are taxed at one of three rates: 0%, 15%, or 20%. Which rate applies depends on your total taxable income for the year, not on how much the dividend itself is. The IRS publishes the income thresholds each year, and they vary by filing status (single, married filing jointly, head of household, and so on).

For most people, may have access to dividends are taxed at 15%. The 0% rate applies to lower-income filers, and the 20% rate applies to higher-income filers. Even at 20%, this is usually lower than the ordinary income tax rate for that same income level.

How your brokerage reports dividends to the IRS

In January, your brokerage sends you Form 1099-DIV. This form breaks down your dividends into categories: ordinary dividends go in Box 1a, may have access to dividends go in Box 1b, and other types (like capital gain distributions) go in other boxes.

The brokerage determines whether a dividend is ordinary or may have access to based on the holding period rules and the type of security. If you held the stock long enough and it's a may have access to type, the dividend appears in Box 1b. If not, it appears in Box 1a.

You report both numbers on your tax return. The software or tax preparer you use will put them in the right places — ordinary dividends typically go on line 5b of Form 1040, and may have access to dividends go on line 5a. The may have access to dividends then get taxed at the lower rate.

Reinvested dividends are still taxable

Many investors set up automatic dividend reinvestment, where the cash dividend is used to buy more shares instead of being sent to their bank account. This doesn't change the tax treatment — you still owe tax on the dividend in the year you received it, even though you never touched the money.

Your brokerage tracks reinvested dividends and reports them on the 1099-DIV just like cash dividends. When you eventually sell the stock, your cost basis (the amount you paid) includes the reinvested dividends, so you don't pay tax on them twice.

What happens if you don't meet the holding period

If you buy a stock, collect the dividend, and sell within 60 days, the dividend is taxed as ordinary income even if the company normally pays may have access to dividends. This rule applies separately to each dividend payment — you could hold a stock for years, miss the holding period on one dividend, and still may have access to for the lower rate on the next one.

The 60-day window is measured around the ex-dividend date (the date by which you must own the stock to receive the dividend). If you're close to the edge, check your brokerage statement to see the exact ex-dividend date for each holding.

Tax-advantaged accounts handle dividends differently

If you own dividend-paying stocks inside a 401(k), traditional IRA, or Roth IRA, the ordinary versus may have access to distinction doesn't matter. In a traditional IRA or 401(k), dividends grow tax-deferred, and you pay ordinary income tax on withdrawals later. In a Roth IRA, dividends grow tax-free and withdrawals are tax-free if you follow the rules.

The may have access to dividend rate only applies to dividends in taxable brokerage accounts. This is one reason tax-advantaged accounts are valuable — you don't have to track holding periods or worry about dividend classification.

Frequently Asked Questions

Do I have to pay tax on dividends if I reinvest them?

Yes. Reinvested dividends are taxable in the year you receive them, even though the cash never reaches your bank account. Your brokerage reports them on Form 1099-DIV, and you report them on your tax return.

What's the difference between Box 1a and Box 1b on Form 1099-DIV?

Box 1a shows ordinary dividends, which are taxed at your regular income tax rate. Box 1b shows may have access to dividends, which are taxed at a lower rate (0%, 15%, or 20%). You report both on your tax return, but they're taxed differently.

If I sell a stock right after the dividend, is the dividend still taxable?

Yes, the dividend is taxable. But if you sell within 60 days of the ex-dividend date, the dividend is taxed as ordinary income instead of at the may have access to dividend rate, even if you held the stock for years before that.

Can I deduct dividend losses?

No. Dividends are income, not deductible expenses. If a stock pays a dividend and then drops in value, you still owe tax on the dividend. The loss on the stock itself may be deductible as a capital loss, but that's separate.

Are dividends from mutual funds treated the same as dividends from individual stocks?

Mutual funds report dividends as either ordinary or may have access to on Form 1099-DIV, just like individual stocks. The fund's holding period and the types of securities it owns determine the classification. Most mutual fund dividends are ordinary, but some funds focus on may have access to dividend stocks.